- If the IMF demands the Government to jump ten feet, the Government is all too eager to jump twenty feet
- It is the working people of this country who have been forced to provide a ‘bailout’
- The domestic debt restructuring process that the Government and the Central Bank are self-congratulatory about is one of the worst attacks on working people in the history of our country
The IMF is in town for the first review of its programme launched in March 2023. Some Colombo circles worry whether the so-called IMF “bailout” will continue. However, their fears should rest aside, because the IMF could not have found a meeker and grovelling partner than the Government of Sri Lanka. If the IMF demands the Government to jump ten feet, the Government is all too eager to jump twenty feet, even if it means breaking the body of the economy. This has been the story of domestic debt restructuring where the working people’s retirement savings were dispossessed by the Central Bank on the very day the IMF team arrived in Sri Lanka.
Contrary to the illusion of an IMF ‘bailout’ of Sri Lanka, it is the working people of this country who have been forced to provide a “bailout”; so the Government can meet the IMF conditions and fulfill the wishes of the global financiers holding much of the country’s external debt. The domestic debt restructuring process that the Government and the Central Bank are self-congratulatory about is one of the worst attacks on working people in the history of our country, and bound to have serious repercussions.
Let’s look at the facts of the IMF agreement. The red carpets being rolled out for IMF now are for the US$ 3 billion to be disbursed over four years. This is a loan and at that a meagre amount. It covers less than 3% of the import bill during the IMF programme period. Its annual disbursements are equivalent to a fifth of the future annual external debt servicing targets of 4.5% of GDP. What most people in Sri Lanka do not realize is that this loan from IMF also comes at high interest cost that Sri Lanka needs to repay. I estimate the interest rates on this foreign currency loan from IMF to be between 4.5% and 7% depending on the interest rates of the Central Banks of major powers and the surcharges of the IMF. Since the IMF claims to be so good with assumptions, targets and transparency, its team of experts while in Sri Lanka should enlighten the Sri Lankan public on the average interest rate that the IMF will levy.
In this context, with little real relief from the IMF, who is the Government leaning on? I have written before that the expected 0.5% of GDP equivalent reduction in retirement funds earnings each year over a ten year period,will amount to about 30% percent loss in the future value of retirement funds. My estimate of that dollar value loss over ten years – with the IMF assumption of annual 3% GDP growth – is US$ 4.5 billion, which is 50% more than IMF loan. If we calculate the loss to retirement funds for the proposed 16 year debt restructuring period, it will be US$ 8 billion. Significantly, this is not a loan that the Government is demanding from the working people, it is a complete write off! In effect the Government is forcing a “bailout” from the working people to satisfy the IMF and the external bondholders.
Next, in the case of almost all the creditors, they voluntarily decide to invest in Sri Lankan Government bonds, knowing well the risks compensated with interest earnings. However, the EPF retirement fund includes a compulsory saving of 8% of workers monthly salary as required by the Labour Department, which has then been invested by the Central Bank in Treasury Bonds. Thus the workers who had no choice in saving or investing are now being forced to “bailout” the Government.
Lessons and resistance
This great betrayal of the working people should make it amply clear that retirement savings can no longer be under the custody of the Central Bank. The management of retirement funds should be under the workers themselves. Furthermore, the investment of these funds should be directed by their representatives towards workers’ concerns including to increase employment and livelihoods; not the investments without returns by successive governments such as the Lotus Tower and expressways.
Over the last decade and a half, the International Financial Institutions and the Government have been committed to promoting the development of domestic capital markets and borrowing in the international capital markets. In fact, even the end point of the current IMF programme as written in the agreement is towards borrowing US$ 1.5 billion through International Sovereign Bonds in 2027. It is such market borrowings in the past that has reduced Sri Lanka to the current debt crisis, and Sri Lanka may end up in cycles of international borrowing and default in the future, much like the cycles of 17 IMF agreements.
While the current parliament and the President it elected, were overwhelmingly rejected by the tremendous protests of the citizenry last year, they are busy passing laws as if the people do not matter. The attack on retirement funds require two clear demands by the working people of any future parliament. First, there needs to be a redistributive wealth tax that redresses the losses to retirement savings caused by domestic debt restructuring. Second, a law that restricts Sri Lanka from commercial borrowing in the international capital markets.
For the IMF, and the global powers that are so supportive of its so-called “bailout” programme, I have a question based on a recent political lesson. A few years ago, Gotabaya Rajapaksa was promoted as a saviour, but after he gained power and a little over two years later, he was reduced to a demon and chased away. Last year, the IMF and its global backers were championed as saviours in Sri Lanka. Where do you think the people will see you in a couple of years?